The US Securities and Exchange Commission (SEC) has proposed values to implement the requirement of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that public companies disclose the median of the annual total compensation of all the employees of a company to the total compensation of the company's CEO (or principal executive officer). If adapted, the rules would require disclosure in any annual report, proxy or other registration or information statement that requires executive compensation disclosure.


Under the proposal, companies would be required to disclose:

  1. the median of the annual total compensation of all the company's employees (except the CEO),
  2. the annual total compensation of the CEO, and
    c.the ratio of (a) to (b) in a ratio in which (a) equals one or, alternatively, expressed narratively in terms of the multiple (b) bears to (a).

For example, the pay ratio could be expressed as "1 to 268" or expressed narratively as, "the CEO's annual total compensation is 268 times that of the median total compensation of all other employees."

In proposing new Regulation S-K, Item 402(u), the SEC acknowledged the difficulty, especially for large companies with various workforces and different payroll systems, of determining the median employee, ranked by pay. The proposed rule would therefore allow companies to use statistical sampling and compensation estimates, based on existing payroll data or tax information to determine the median employee. Then, the total compensation of that employee for the most recent fiscal year must be determined on the same basis and in the same level of detail as that of the named executive officers as reported in the company's summary compensation table. The specific elements of the proposed rule reflect the SEC's consideration of the approximately 22,860 comments letters it has already received from industry, law firms, and consultants on the complexity of complying with the new requirement in response to an earlier request for comment on Dodd-Frank implementation. The most important details of the new rule are summarized below.

All employees as of the last day of the fiscal year are considered in determining median compensation. To determine the median, the company must consider all employees employed on the last day of the fiscal year. In so doing, it must consider:

  • US and non-US employees,
  • employees of the entire enterprise (i.e., including subsidiaries),
  • full time and part time employees, and
  • seasonal and temporary employees employed on the last day of the fiscal year.

However, consultants and independent contractors are not employees and need not be considered, and leased employees need not be considered.

Compensation of permanent (as opposed to temporary or seasonal) workers hired during the fiscal year may be annualized.

  • Annualization is permitted, not required.
  • Annualization is not permitted for seasonal or temporary workers.
  • Compensation of part time employees employed a portion of the year may be adjusted to the full-year part time compensation. It may not be adjusted to full-time, full-year compensation.
  • Cost-of-living adjustments for non-US workers (to reflect purchasing power disparity) are not permitted.

No specific calculation methodology is mandated for determining the median employee.

  • Companies may choose from several different permitted methodologies to identify the median employee, including:
    • statistical sampling,
    • estimates, and
    •  any other consistently applied compensation measures (for example, cash compensation)
  • The company must briefly disclose and consistently use the methodology and any material assumptions, adjustments, or estimates to identify the median employee. Any estimates must be identified as such.
  •  A company is free to choose the most appropriate and cost-effective methodology for determining the median employee, based on its own facts and circumstances, such as:
    • size and nature of the workforce,
    • complexity of the organization,
    • stratification of pay levels across the workforce,
    • types of compensation,
    • extent to which different currencies are involved, and
    • number of payroll systems involved and the degree of difficulty in readily integrating the systems to readily compile total compensation information.
  • Several methodologies are specifically permitted:
    • estimates,
    • statistical sampling and
    • identifying median employee based on any consistently applied compensation measure, such as compensation reported in tax or payroll records, as long as the measure used is briefly disclosed. (For example, "we found the median using salary, wages and tips as reported to the IRS on form W-2 and the equivalent for our non-US employees.")

Compensation of the median employee must be determined the same way as for named executive officers. Once the company identifies the median employee under the flexible standards described, disclosure of the fiscal year compensation of that median employee is subject to the same rules as apply to the named executive officers.

  • Dodd-Frank requires conformance to the summary compensation table rules in effect in 2010. The rules have not changed since 2010. The SEC said it will consider the effect on pay ratio reporting of any future changes in the summary compensation table disclosure requirements when they occur.
  • "Base salary" will be deemed to refer to "wages plus overtime".
  • For multiemployer defined benefit pensions plans, companies should use reasonable estimates in determining an amount that reasonably approximates the aggregate change in actuarial present vale of an employee's defined benefit pension.
  • The company may exclude personal benefits (perks) under US$10,000 and may determine the value based on reasonable estimates.
  • If the company chooses to include perks under US$10,000 or items such as broad-based health coverage, then it also must include such items in the CEO pay calculation for purposes of the ratio.
  • The value of personal benefits (such as housing) should be based on the incremental cost to the company.
  • Government-mandated pensions would not be considered a "defined benefit plan" for purposes of the required disclosure. Therefore, any accrued pension benefit under a government-mandated pension would not be considered "compensation" under the proposed rule, notwithstanding that the company may be required to contribute to the plan through taxes or otherwise. The rationale is that the government, not the company, bears the actuarial risk on a government-mandated pension.

The company must briefly disclose and consistently apply any methodology it uses to identify median compensation or to determine total compensation or any elements of total compensation, and must clearly identify all estimates as such.

  • If it uses statistical sampling, the company should disclose: •the size of the sample as well as the total population,
    • any material assumption it used in determining sample size, and which sampling method(s) it used,
    • how the sampling method deals with separate payrolls or other issues involving multiple businesses or geographical segments, and
    • if changes in methodology, material assumptions adjustments or estimates are material, the reasons for the change and an estimate of the impact of the change on the median and the ratio.
  • The SEC stresses the disclosure should be brief and non technical (not a discussion of statistical formulas, confidence levels or the steps used in data analysis).
  • There is no requirement for a narrative discussion of the ratio, the median or any supplemental information. Supplemental disclosure is permitted, however. Also, companies may disclose additional ratios.

"Annual compensation" means compensation for the last completed fiscal year.

  • Fiscal year companies using calendar year tax records to determine the median employee would be required to calculate the median employee's total compensation for the last fiscal year, rather than use the annual payroll or tax records.

The pay ratio disclosure would be "filed," not "furnished" for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934 (Exchange Act) and, accordingly, would be subject to potential liabilities thereafter.

Effective date/transition period.

  • A company must comply with new rule for the company's first fiscal year commencing on or after the effective date of the rule, but no pay ratio disclosure is required until the Form 10-K annual report or, if later, the proxy filing for the next annual shareholder meeting following the end of that fiscal year. For example, if the rule becomes effective in 2014, a company with a calendar year fiscal year would first be required to include pay ratio information about its 2015 fiscal year in its proxy statement for the 2016 annual meeting. This time table allows one full reporting cycle to implement any necessary system changes.
  • The pay ratio would not have to be updated more than once annually. The pay ratio disclosure need not be updated until the company files its proxy statement for its annual shareholder meeting, provided that updated pay ratio information must, in any event, be filed not later than 120 days after the end of the fiscal year (i.e., with the Form 10-K annual report).


  • There is a transition rule for new registrants.
  • Non-US companies that qualify as "foreign private issuers" and Canadian MJDS filers are not subject to the rule.
  • Companies that qualify as "emerging growth companies" and smaller reporting companies are not subject to the rule.

Requests for Comments

There are 60 specific requests for comment embedded in the proposal covering almost all aspects of the proposed rules. For example, comments are requested on:

  • whether there are other less burdensome ways of satisfying the statutory mandate to cover "all employees" for companies with non-U.S. employees,
  • specifically what data privacy laws might impede the ability to collect or transfer pay data,
  • whether the rule should cover employees of the "issuer's" subsidiaries or only employers of the "issuer,"
  • whether the proposed inclusion of "all employees" raises competition concerns,
  • whether cost-of-living adjustments for non-U.S. employees should be allowed,
  • whether the flexibility of the proposed requirements could allow a company to distort its pay ratio and, if so, how,
  • whether guidance is needed on how to apply the "total compensation" definition,
  • whether there should be more detailed guidance on the use of estimates, or whether estimates should be permitted at all,
  • whether the "brief description" of methodology and assumptions is sufficient, and
  • should more metrics be required to be disclosed?

The proposal is controversial, and the final rule still may change. In a strongly worded dissenting statement, Commissioner Daniel Gallagher said: "There are no—count them, zero—benefits that our staff have been able to discern [from the pay ratio disclosure]. As the proposal explains," [T]he lack of a specific market failure identified as motivating the enactment of this provision poses significant challenges in quantifying potential economic benefits, if any, from the pay ratio disclosure[.]" He particularly criticizes the proposed rule's requirement of considering the company and all its subsidiaries (instead of only the "issuer" as the statute requires) and of considering the global workforce, calling these interpretations of the statute "unnecessary overkill."

Gallagher also noted the SEC's mandate under the Exchange Act to "consider the effects of what we do on competition," and stated that "today's proposal continues a trend of politically motivated new disclosure requirements that impose unnecessary compliance costs on US issuers, reducing their international competitiveness while providing no benefits to investors...."

He urged "investors, public companies and others directly affected by the proposal to submit detailed, data-heavy comments."

You can find the full text of the proposal at